A New Government Study on the Effective Corporate Tax Rate? Hint: It’s 5%

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According to Finfacts:

‘Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland’s effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.’

Apparently, the Government has ditched its previous claim that the effective corporate tax rate is 11.9 percent – when the study this was based on was shown by Dr. Jim Stewart to be defective as a comparator.  Now it needs a new study to substantiate an old claim (it helps that the Government has already predetermined the conclusion, now they just have to fill in the numbers).

This blog has always endeavoured to assist the Government.   So I’d like to point the Government to some reasonably robust numbers.  It can use either Eurostat or its own Central Statistics Office.  Either way, they show Ireland has a low-low effective corporate tax rate.

One part of the equation – how much corporate tax rate is paid – is easy to determine.  What is more difficult to estimate is the level of profits.  Both Eurostat and the CSO use the category ‘entrepreneurial income’.  Eurostat defines it this way:

‘. . . net entrepreneurial income . . .  approximates the concept of pre-tax corporate profits in business accounting. ‘

The CSO defines entrepreneurial income as

‘ . .  a more comprehensive measure of corporate profitability.’

So, armed with this ‘more comprehensive measure of corporate profitability’, what are the effective corporate tax rates for EU-15 countries – combining both financial and non-financial companies?


Ireland is down there at the bottom at 5 percent – only slightly above that other notorious low-tax regime, Luxembourg.

There are three countries – Portugal, Italy and Finland – that comprise the highest tax rates.  Most of the EU-15 countries are grouped in the middle between 12.1 and 14.5 percent.

And then there are the three low-tax regimes – Netherlands, Ireland and Luxembourg.  These happen to be the countries that the EU Commission is investigating for corporate tax practices.

So how much revenue would Ireland gain if it taxed corporate profits at the average EU-15 rate?  It would gain an additional €6 billion.  That’s a healthy revenue boost.  Of course, some would point out that if Ireland raised its tax to the EU average, then much of the profit that is booked here (i.e. profits generated in other economies and imported here to take advantage of our low tax rates) would go somewhere else. Therefore, goes the argument, we could raise the rates but not end up with more revenue.

There’s something to this argument – in a dismal way, debilitating way.  For Ireland has been a leading agent – though by no means the only one – in the race-to-the-bottom in corporate taxation.  Some call this ‘competitive’ in the same way that cutting wages, incomes and living standards is called ‘competitive’.  This is taking a significant toll on the Eurozone economy and public finances.

Back in 2000, the effective corporate tax rate in the Eurozone was 18.4 percent.  By 2011, this had fallen to 12.5 percent.  This may not seem like a lot but it is.  This is equivalent to approximately €107 billion reduction in Eurozone corporate tax revenue.  €107 billion.

Imagine if that revenue was available to the Eurozone:  less tax on labour, more expenditure on public services and social protection, higher investment in telecommunications, renewable energy, and education (let’s not forget that there are 76 million people in the Eurozone at risk of poverty and social exclusion).  That €107 billion would mean a significant boost to domestic demand which would, in turn, mean more prosperous markets for exporting firms to operate in.

Instead, there’s less of all that – and Ireland is trapped in a low-tax regime, flattered by artificial export numbers to make us feel that our system is working when in fact we are a leading contributor to a system that is not working.

The Government has the opportunity to take a first step towards a more open and honest approach to all this.  And that can be done by acknowledging that we have an ultra-low tax regime (the second step would be to acknowledge that we are tax haven-conduit but let’s not get ahead of ourselves).

And that first step should be easy because all the data is there.

Can’t wait to see what the Government comes up with.

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